After paying for tuition and other educational expenses, you may have leftover student loan money. What will you do with it? You can save it for future educational expenses, pay off existing debts, or return it.
Don’t let the unused funds waste away. Here’s the breakdown of your options and the impact of leftover student loan funds so you can set yourself up for financial success.
Common Reasons for Unused Student Loan Funds
Before looking into your options, here are some common reasons why your financial aid disbursements are more than you spent this semester:
- Overestimated Expenses: You may have expected your tuition, books, and living expenses to be higher than they are.
- Scholarships and Grants: You don’t need as much loan funding if you receive new scholarships or grants.
- Frugality: Efficient budgeting may have left you with funds you weren’t planning on.
Remember: any unused student loan money is still part of your loan and must be repaid. You are responsible for paying interest on the unused funds, even if you don’t use them at the original disbursement date.
Use our Loan Calculator to determine the monthly loan payment and total payments on your student loans.
Options for Unused Student Loan Money
The good news is that you have a few great options for what to do with your unused student loan money.
Option 1: Return to the Lender
Returning unused funds to the lender is a responsible choice. Here’s why:
Benefits of Returning Unused Funds
Returning unused student loan money is a smart financial move for a few reasons. First, it directly reduces your total amount of student loan debt. This can make your future loan repayments more manageable and less stressful.
Also, by returning the funds you don’t need, you avoid owing the interest accrual on that amount during your time in school if you have either an unsubsidized federal student loan or a private student loan. Both of these types of loans accrue interest while you’re attending school, even if you aren’t making student loan payments.
You can quickly see how much you can save in interest over the life of your loan with our loan comparison calculator. Imagine you received $10,000 in loan disbursement this year, but you only need $9,000 to cover your expenses. If you return that $1,000 and reduce the loan amount to $9,000 that you don’t need now, it can save you over $583 in interest over the life of your loan (with a 5% annual interest rate, 20-year loan term).
Monthly Payment |
Total Payments |
Total Interest |
|
$10,000 Loan |
$66.00 |
$15,838.18 |
$5,838.18 |
$9,000 Loan |
$59.40 |
$14,254.36 |
$5,254.36 |
Difference: |
$583.82 |
How to Return Unused Funds
If you are returning federal student loan funds, notify your school’s financial aid office within 120 days of the disbursement date, as each school may have a slightly different process. You should not be charged interest or fees on any loans canceled within the 120-day timeframe.
Contact your loan servicer to return unused student loan funds to a private lender. You can find their contact information on your loan statement or through your online account. Explain to them that you have unused loan funds that you wish to return. Your loan servicer will provide specific instructions on how to proceed, which may include filling out a form or sending a written request.
Option 2: Keep the Funds
By setting aside these funds rather than returning them, you can ensure you have the resources to continue your education without taking on additional debt. However, if you decide to keep the funds, there are a few things to keep in mind.
Use for Educational Expenses
Unused student loan funds must go toward educational purposes. You can invest in professional development opportunities, cover costs for applying to graduate school or upgrade essential academic resources like a new laptop or high-quality textbooks.
Prepay Your Existing Student Loan Debt
One of the most effective ways to use your unused student loan amount is to pay off existing debt, particularly high-interest debt like credit cards or private loans. You can save yourself a lot of money in the long run by reducing the interest you’ll have to pay over time.
If you will pay off debts, prioritize those with the highest interest rates first. These debts tend to have the most significant impact on your overall financial well-being.
Similar to our earlier example of returning $1,000 of a $10,000 loan, if you use that leftover $1,000 to pay down higher-interest debt (such as an 8% loan with a 20-year term), then you can save over $1,000 in interest over the life of that 8% loan.
You will still need to pay the interest on the new loan amount. But if the new loan is at a lower interest rate (say 5% annually), you’re still saving over $400 in interest over the life of your loans by transferring the debt to a lower interest rate loan.
Know the Rules and Regulations
There are a few key rules to consider when deciding whether to keep unused student loan funds. Failure to comply with these guidelines can have serious consequences.
One of the primary rules is that student loan money must be used for educational expenses only, including tuition, fees, textbooks, housing, meal plans, and other related expenses. Using the funds for non-educational purposes, such as personal expenses or entertainment, is generally not allowed and could be considered fraud.
It’s also worth noting that the rules for student loan money can vary depending on the type of loan (federal or private) and the lender’s policies. Review the terms of your loan agreement to ensure that you are using the funds in compliance with all applicable rules.
Another important rule is that any unused student loan money must be returned to the lender within a specific timeframe, typically within 120 days from the loan’s disbursement date. Otherwise, interest will begin accruing.
You can still pay it back now, as federal and private student loans cannot charge prepayment penalties. But it will be considered a prepayment rather than a return of the funds (and you will be responsible for any interest accrued during the time period).
Impact on Future Borrowing and Financial Aid
When you take out student loans, the money you borrow impacts future financial aid and borrowing opportunities. Unused student loan funds can complicate this situation.
Adjustments in Future Loan Eligibility
Unused student loan funds can impact your ability to borrow additional money for future educational expenses because lenders may view the funds as a sign that you don’t need as much financial assistance. So, you may receive less favorable terms on future loan applications.
Impact on Financial Aid Packages
Another concern with keeping unused student loan money is that it is considered an asset when you apply for federal student aid through the annual FAFSA process. The unused funds are factored into your Student Aid Index (SAI) if they are still in your bank account, potentially reducing the amount of aid you can receive.
For example, if your parents have an annual adjusted gross income of $100,000 and you have no college savings. Then, according to our financial aid calculator, your SAI is $11,268 for the 2024/2025 academic year.
However, if you put the unused student loan money of $1,000 in your bank account, the same scenario would increase your SAI to $11,324, indicating that you require less financial aid because you already have funds available in the bank.
Preventing Future Excess Funds
It can be difficult to nail down how much you will need in student loans. It’s even possible that you are eligible for more than you need. Carefully budgeting your student loan needs isn’t an exact science, which is why there is a 120-day period in which you can return loans without accruing interest.
But if you’re interested in pinning down your budget so you don’t have excess funds in the future, here are a few steps to take:
- Start by creating a budget that includes tuition, fees, books, supplies, and living expenses. Our College Savings Calculator includes a section for college cost of attendance, which is a great place to start your budgeting journey.
- Consider any other sources of income, such as part-time work, 529 plans, or scholarships.
- Try to factor in a small amount for unexpected expenses.
- Now you have a picture of your financial needs, borrow only what is necessary to cover those costs.
This approach helps you avoid excess debt and ensures you only borrow what you truly need, reducing your financial burden after graduation.
Unused student loan money in your bank account presents both opportunities and potential challenges. While it may be tempting to consider these funds a windfall, it’s prudent to approach the situation with a responsible and long-term view. Understand the impact on future borrowing and financial aid, avoid unnecessary spending, and use the money wisely. Then, you can confidently apply for student loans and set yourself up for financial and educational success.
